Increasing exempt current pension income percentage in your Self Managed Super Fund (SMSF)

Exempt current pension income (ECPI) is the amount of income that is exempt from taxation inside an SMSF.  An SMSF has exempt income if the SMSF has a pension or pensions that comply with the minimum pension standards each year. A fund can be 100% tax free if all members are in pension phase and the minimum pension/s for each member were withdrawn for the financial year that ECPI applies.

The tax exemption applies to all income (including capital gains) that is generated from the fund assets held to support retirement phase income streams. ECPI does not apply to non-arm’s length income a fund may receive or any concessional contributions.

For example, the Happy Days Superannuation Fund has two members both in pension phase in the 2018 financial year, no member has any accumulation balances and each member withdrew at least their minimum pension amount prior to 30 June 2018.  The fund did not receive any non-arm’s length income so all income received on the fund’s assets throughout the year would be 100% tax free.

Importantly if at any time the pensions for which the ECPI has been granted do not comply with pension standards (by withdrawing the minimum pension amount required), the SMSF will lose its exempt current pension income which may apply to the full financial year.

It is important to remember that if an SMSF has an ECPI amount, that only the taxable percentage of expenses can be used to claim a tax deduction.  For example, a SMSF has an actuarial percentage of 90%, the taxable proportion of the SMSF’s income is 10% and therefore only 10% of expenses can be deducted from the SMSF’s remaining income.  If the SMSF is 100% tax free, no expenses can be claimed because there is no income for the expenses to be deducted from.  Expenses cannot be banked or saved like capital losses.   So in 100% pension phase expenses cannot reduce taxable income.

When an SMSF has both pension accounts and accumulation accounts running at the same time, an Actuarial Certificate is required to confirm the correct tax free percentage of the SMSF’s income.

The Actuarial Certificate will take into account the timing and amount of every contribution, pension payment and any member transfer.

A higher actuarial percentage will result in higher ECPI and less tax to pay.

The timing of contributions and pension payments throughout the year can have an effect on the level of exempt current pension income (ECPI) an SMSF can claim in a particular year.

For those that are eligible to make concessional or non-concessional contributions into super post retirement, the ECPI percentage is reduced the longer the period of time that contributions are held in a member’s accumulation account.

The actuary requires details on when members benefits are paid, whether they are pension payments or lump sums and whether these are paid from a member’s pension account or a member’s accumulation account.

For example: A SMSF with a sole member aged 63 years of age who has met a condition of release, has $1.6 million in pension phase and $400,000 in accumulation phase.  The member is seeking to draw an annual income stream of $80,000 while the net earnings of the funds was 6 per cent per year. Note that the minimum pension requirements for someone aged under 65 years of age with $1.6m in pension is $64,000 ($1.6m x 4%)

If the member drew down his / her $80,000 income stream monthly by exhausting the minimum pension payment requirement first and then sourcing the rest of the payments from his / her accumulation account as lump sums, an estimated ECPI of 74.65 per cent would apply.

If however monthly income payments above the required 4 per cent minimum pension payments were made by lump sums from the accumulation account first, with the remaining payments subsequently made from the pension account, the ECPI increases to approximately 80.32 per cent because more money is retained in the pension account for a longer period and the accumulation account is reduced sooner.

If you are seeking to draw out more than the minimum pension required for a financial year, you need to have met a condition of release and ensure the funds deed and ATO compliance documentation is in place. Please speak to our Superannuation Manager Helen Cooper for more information.

Any information provided in this article is general in nature and does not take into account your personal objectives, situation or needs. The information is objectively ascertainable and was not intended to imply any recommendation or opinion about a financial product. This does not constitute financial produce advice under the Corporations Act 2001.

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WARNING: Scams targeting ATO Customers

With the busy tax season in full swing, there is a heightened amount of fraudulent activity targeting Australians. The ATO reported more than 37,000 scam attempts last year during tax time. While many people were alert and didn’t fall for the scams, more than $630,000 was handed over to scammers.

In years gone by, we have seen the following scams.

Phone scam – voicemail

Scammers are leaving voicemail messages threatening the recipients with arrest due to an unknown tax debt or suspected tax evasion.  The scammers claim to be from the ATO and may threaten that a warrant for the person’s arrest will be issued if they do not call the scammer back on the phone number provided.

Email scam – tax refund review

Scammers are sending fake ATO emails asking completion of a ‘tax refund review’ form to receive a refund.  The form asks for online banking credentials, credit card numbers and limits, and personal address information.  Do not click nor save the attachment as it may download malicious malware onto your computer.  Do not disclose the personal information the form is requesting.

Phone scam – fake debts & refunds

ATO phone impersonation scams have been widely reported.  The scammers may tell you:

• a complaint has been made against you and you are committing tax fraud
• that you have to pay a debt that you know nothing about
• that you may be immediately arrested if you don’t pay the debt straight away
• to pay the debt using unusual methods of payment that the ATO does not use such as iTunes, Bitcoin, store gift cards or pre-paid visa cards
• you are owed a tax refund but you have to provide a personal credit card number for the funds to be deposited into.

This year it seems we are exposed to fake text messages sent by the ‘ATO’ giving people false information about their tax, in particular their refunds. Below is an example of the text messages these scammers are sending to the public:

George received a text message from ‘ATO Refund’ saying there’s a tax refund of $275 for him to claim. All he needed to do was click on the website link and log in with his phone number and the PIN number provided in the message. He was asked to fill in personal details and provide his Tax File Number (TFN) and credit card number (including the 3-digit code from the back of his card) so his refund could be deposited into his account.

Another version of this scams asks people to pay a small fee via their personal debit/credit cards to receive the refund, which leads to the scammers being able to deduct large sums of money from your accounts within days.

The ATO have identified the main components of these scams which include:

• Appears to come from the ATO
• Tell you your eligible for a refund and you need to respond
• Ask you to pay a fee to receive a refund
• Contain hyperlinks that lead to a fake website or a fake login page
• Instruct you to click on a link to submit a form with personal information
• Lead to money being stolen from your credit/debit card account
• Ask for personal information including TFN or credit card details

If you are unsure if you are on the receiving end of a scam, contact your accountant at GeersSullivan and we will contact the ATO on your behalf.

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